Friday, February 8, 2013

Have you ever wondered why the taxes on airline tickets are so high
that the taxes far exceed the advertised fare? According to HBS
professor Ben Edelman and Harvard student Xiaoxiao Wu, it’s because
sometimes the “taxes” aren’t actually taxes. In a new post on Edelman’s blog, the researchers chastise several airlines for their ticket pricing practices:

In one round trip New York-Paris ticket
we quoted in January 2012, the fare was listed as $230 while “tax” was
listed as $598.14 — fully 72% of the listed total. If government taxes
were actually as large as Air France claims, many passengers might want
to complain to responsible politicians and regulators. And passengers
might have a different view of cramped seating, unpalatable food, or
other service shortfalls on a $230 ticket versus a $828.14 ticket. But
in fact, specifically contrary to Air France’s characterization of
$598.14 as “tax,” the majority of the “tax” was not charged by any
government, airport, or similar authority, and rather was retained by
Air France to defray its ordinary operating expenses.

Thursday, February 7, 2013

Boom or bust: Competition heats up for Indonesia's budget airlines

SINGAPORE/JAKARTA |
Wed Feb 6, 2013 8:41pm EST

(Reuters) - Indonesia's economic boom should be a bonanza for airlines
clamoring for a slice of the world's fourth-most populous country. But
the bankruptcy of its No. 4 airline, Batavia Air, shows how smaller operators are finding it hard to survive.Batavia became the second budget carrier to run into debt problems in Indonesia in the past two years - a victim of the extremely tight operating margins that exist in what is a crowded market.And more are likely to go bust.
Transportation ministry data shows there are 22 active local commercial airlines, not including cargo and charter airlines.In one of the world's fastest growing but most competitive aviation markets, Lion Air, Malaysia's AirAsia Bhd, flag carrier PT Garuda Indonesia, and PT Mandala Airlines, part-owned by Tiger Airways Ltd, are all expanding capacity.But
smaller operators such as 11-year-old, loss-making Batavia, a nascent
international carrier that was declared bankrupt by a court last week
after struggling to repay its debts, are feeling the strain.
The low-cost carriers are being forced into selling tickets at a price far below break-even."Competition
has intensified and the weak will be weeded out," said Shukor Yusof,
Singapore-based aviation analyst at Standard & Poor's Capital IQ
division. "Smaller players will find it increasingly tough to stay
solvent."Yet, Indonesia presents
clear opportunities: by 2030, a further 90 million people will have
entered its consumer class, more than any other country except China and India, according to research by consultants McKinsey & Co.Lion
Air controls a little less than half of the market, followed by Garuda
with about a quarter, Sriwijaya Air with nearly 12 percent and Merpati
Nusantara 3 percent.However,
smaller airlines lack the huge cash flow required to sustain loss-making
fares, stump up money to acquire coveted landing slots and fund new
aircraft."The market is very
fragmented and highly competitive in Indonesia, so you can also say that
if there is one less carrier, that is actually healthy for the
industry," said Brendan Sobie, the Singapore-based chief analyst at the
Centre for Asia Pacific Aviation, an industry consultancy."Just because one of the smaller airlines goes bankrupt, it doesn't mean that there's not going to be growth."

COMPETITION IS JUST TOO TOUGH

Both Lion Air and AirAsia have placed record plane orders worth billions of dollars with Boeing Co and Airbus EADS.PA over the last two years.On the surface, Batavia was full of promise, operating 34 planes in a country with a booming economy
and 240 million people spread over 17,000 islands. In July, Southeast
Asia's top budget carrier, AirAsia, announced plans to buy Batavia for
$80 million.But by October, AirAsia pulled out, citing risks to the acquisition.What went wrong?"The
main problem for us is that the competition is too tough," said Sukirno
Sukarna, the former commercial director at Batavia. "Our fleets were
old, so we can't really sell our tickets at the top-end price limit set
by the government while other airlines have newer planes and set the
higher prices."Its books revealed
an airline under enormous stress. Although its load factor, the
proportion of seats occupied by paying passengers, was between 70 and 80
percent, near the industry average, it was unable to cover costs and
sold tickets at prices far below break-even, Sukarna said.On
its busy three-hour route from Jakarta to Ambon in eastern Indonesia,
Batavia needed to sell tickets for at least 1.5 million rupiah ($155)
each to turn a profit. But facing cut-throat rivals, tickets sold for
under 1 million rupiah ($100).Losses
piled up, reaching 310 billion rupiah ($32 million) on revenue of 4.2
trillion rupiah ($434 million) last year, Sukarna added. Total debts
swelled to 1.2 trillion rupiah ($124 million), according to a bankruptcy
lawyer who handled its assets and declined to be identified by name."This
(Batavia's bankruptcy) indicates how tough the market is now, but the
growth is there," Arif Wibowo, chief executive of Garuda's low-cost
carrier Citilink said on the sidelines of an industry event in
Singapore. "The growth is always followed by fierce competition."Batavia,
which captured 11 percent of Indonesia's total market in 2011, mainly
served local routes with some international destinations including
Guangzhou in China and Singapore.Mandala
suspended flights in early 2011 as it struggled with debt. It was taken
over by private equity firm Saratoga Capital and Tiger Airways and is
flying again."This current
environment basically allows bigger airlines to get bigger, while
smaller airlines will go bust," said Toto Nursatyo, chief commercial
officer at Sriwijaya Air. "Those who have bigger capital and bigger
market share will thrive while those who just come in and try their luck
will struggle."